MUMBAI: Three different bond yields, three initial coupon rates, but exactly identical maturity horizons: It’s the ideal recipe for a rewarding arbitrage play.Three 10-year sovereign papers, including the benchmark, are yielding spreads up to 49 basis points among themselves. That has created a window of opportunity for quant experts on bond desks.“Larger than usual yield differential leaves a potential opportunity of spread/arbitrage trades,” said Ritesh Bhusari, deputy general manager at South Indian Bank. “This is an anomaly, which should narrow down once the central bank stops including the benchmark papers in its bond purchases programme or starts adding off-the-run benchmark papers.”So, how is the deal stacked in favour or against? “If the spreads widen, spread betters will lose money, while they will gain if the differentials narrow,” Bhusari said.Unless, the wrinkles are ironed out, the differential will continue to yield a potential trading opportunity between on-the-run and off-the-run sovereign bonds – all of them maturing in 2030. The benchmark paper yielded 6.01% Monday compared with 6.52% in the series bearing 7.88% coupon, show Bloomberg data compiled by ETIG. Bonds with 5.77% coupon yielded 6.22%.“Liquidity for high-coupon off-the-run bonds tends to be sub-optimal given their lower liquidity,” said Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund. “Investors are currently refraining from taking very long-term interest rate calls amid covid uncertainties, stubborn inflation and the large borrowing program for fiscal FY22. This continues to widen the gap between off-the-run and on-the-run bonds.”There are off-the-run papers not being issued any more. Generally, lower trading volumes limit transactions in those bonds. Historically, this entails a differential of 5-10 basis points with on-the-run paper, which is supposed to be the benchmark series.RBI keeps auctioning the benchmark bonds unless issuances reach a particular level.However, high-coupon bonds are a lure for long-term investors seeking higher interest income amid a record low interest rate.“It is giving a confusing signal to bond vigilantes and investors. The distortion gets reflected on CPSE and private sector non-convertible debentures,” said a Mumbai-based advisor, who gives recommendations to several corporate treasuries.“Finally, retail investors are paying a price as their real interest earnings are negative after adjusting with inflation,” the person said.A trader will likely consider taking a position in the benchmark series, but an investor will invest in a security giving the highest yield.